Martin Wolf: Economists Need to Wake Up and Smell the Coffee

Well, that isn’t exactly what he says, but close. Martin Wolf, the Financial Times’ chief economics editor, in his February 6 commentary, “,” says that economists are the big skeptics about global warming, and the possible consequences are too dire for them to continue to take this stance. For Wolf, this is a particularly emphatic piece:

In the public at large, including sizable sections of the business community, a new consensus on climate change has emerged: it is happening; it is important; and something needs to be done….Yet there is one group among whom dissent reigns: economists.

It was to them, above all, that Sir Nicholas Stern’s review on the Economics of Climate Change was addressed. It has failed to persuade. So much the worse for economists, the environmentally minded will declare. I disagree. Economists are trained to address the costs and benefits of alternative policies rigorously. Scientists are not.

What then do economists object to in the arguments for early and forcible action to halt the increase in the stock of greenhouse gases? In essence, they make three arguments: first, the Stern review has exaggerated the economic costs of climate change; second, it has underestimated the costs of mitigating emissions; and, third, it has employed the wrong discount rate for relating near-term costs of mitigation to the costs of continuing on our present course….

My answer to these important points is that the problem of climate change should not be viewed as just another investment decision. It is a question of insurance against an uncertain, but possibly world-transforming outcome. People who insure their houses against fire must expect to lose money, since the insurance company has a profitable business. They do so, because they cannot bear the loss. The same applies if people decide to protect their house against flooding even if the expected cost of flooding (the probability of its happening times the size of the loss) is less than the cost of the protection. Similarly, we could rationally act to reduce the likelihood of severe climate change, even at the price of lowering expected incomes.

These economists are performing a valuable service by forcing policymakers to understand the nature of the decision they confront. My conclusion, however, is that it still makes sense to try to reduce the risks of extreme outcomes. If it were possible to do so at a price of just 1 per cent of GDP, we should pay willingly. This would lose the world just four months of growth, which is hardly significant. Losing much more than that would begin to raise doubts. But the only way we can find out what stabilising emissions would cost is to try. At the moment the debate is largely theoretical, on both sides.

The debate on global warming has, at last, moved on. While there are still sceptics on the science, the tide has moved decisively against them. But the question of how much to pay to mitigate emissions remains open. So does how to design efficient policies. Economists are right to argue that eliminating the risk of climate change cannot be the overriding objective of policy: it makes no sense to commit suicide out of a fear of dying. But it is perfectly sensible to pay a significant amount to lower the risks. That was my view on reading the review. It remains my view today.

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